Clawback
What is clawback?
The terminology can be confusing particularly as many people use the same word to mean
different things. To avoid confusion it is better to use the term “clawback” to mean the repayment of
remuneration after it has been paid (which is relatively unusual). The term “performance
adjustment” (originally called “malus”) means the forfeiture of all or part of a bonus or long term
incentive award before it has vested and been paid. It is performance adjustment which the FRC
are referring to in their consultation.
Background
The focus on performance adjustment and clawback has arisen largely out of the banking crisis.
The PRA Remuneration Code (which applies to financial institutions) requires that performance
adjustment is operated in certain circumstances.
The PRA Remuneration Code does not require clawback (i.e. post vesting). However, the
European Banking Authority’s Guidelines on Remuneration indicate that it may be appropriate to
apply clawback in the case of “established fraud or misleading information” or where there is a
breach of the Guidelines.
The UK Corporate Governance Code, which applies to all listed companies, currently states that
“consideration should be given to the use of provisions that permit the company to reclaim variable
components in exceptional circumstances of misstatement or misconduct”.
Many companies are making variable pay such as deferred bonus payments and share awards
subject to performance adjustment provisions. The expectation is that, where appropriate,
companies will apply such provisions to reduce awards.
Current market practice
As a result of this focus, it has now become practice for many companies to have at least
performance adjustment and clawback in some cases.
Most LTIPs operate on the basis that awards will vest to the extent certain specified performance
targets are met. Performance adjustment allows for a further adjustment (i.e. reduction of an
award including to nil) to be made even though the performance targets may have been met. In
the case of bonus deferral arrangements, it allows for similar reductions even though bonus
targets and any holding requirements have been met. The rules may give complete flexibility but it
is more usual to include a number of circumstances in which an adjustment will be considered,
with flexibility to consider other events.
The clawback of payments which have already been made is unusual. Such provisions, if any, are
normally restricted to circumstances of fraud or criminality.
Key issues to consider when implementing performance adjustment/clawback
There are a number of issues to consider.

In what circumstances should performance adjustment/clawback apply. Examples include:

where a material misstatement of the company’s financial results has occurred;

where the business unit or profit centre in which an executive works or has worked
has made a loss as a result of circumstances that could reasonably have been
risk-managed;

any error or misstatement which has resulted in a material overpayment to the
executive, whether in the form of awards under the relevant plan or otherwise,
irrespective of whether the relevant executive is at fault; and/or

the conduct, capability or performance of the executive and the performance of any
team, business area or profit centre.

Who should be subject to performance adjustment/clawback? All those at “fault”, the
whole organisation, or just the business unit affected? What about leavers?

the extent of the adjustment/clawback? Should it take into account the degree of fault,
impact on reputation, the loss suffered?

Is it enforceable? It is important that the performance adjustment/clawback is properly
implemented from the outset and that any enforcement is fair and not contrary to the
implied term of mutual trust and confidence between employer and employee. There is a
real risk that executives will challenge performance adjustment/ clawback and it is unclear
how courts will approach these cases.

It is important to get the wording of the rules right to ensure enforceability.

As well as rules, companies should have a written policy in place on how the
arrangements will be operated.
October 2013